I am frankly amazed that these problems have emerged because it seems to me that the lawyers representing the issuers of these securitizations owed professional obligations to undertake due diligence. This due diligence would require, at a minimum, to see to it that the notes and mortgages being pooled were valid under state law; that the mortgage was perfected, recorded and could be enforced through foreclosure in the event of default; and, that the foreclosure proceedings would not entail excessive cost. These mortgage interests in real estate then must have been transferred to investment vehicles in writing, in accordance with the Statute of Frauds, and through a recorded transfer that would preserve priority against subsequent transferees. A lawyer cannot be willfully blind to a client's reckless misrepresentations and must exercise due diligence to avoid participating in a fraud. Thus, a mortgage securitization must include enforceable mortgages. This entire process would then be preserved through the retention of appropriate documentation.
So, in 2007, when these issues first appeared, I was certain that they must be the result of isolated aberrations. In fact, the recklessness (or worse) of the private label securitizers now appears to be systemic and has triggered a coast-to-coast investigation of foreclosures by all 50 state attorney generals. There are three major problems.
First, there is certainly a procedural problem spawned by so-called robo-signers who were used to short-cut court procedures by signing affidavits in support of foreclosure actions without any factual basis or investigation. Some robo-signers executed 6000 affidavits in support of foreclosure per week. This systemic effort for cheap foreclosures simply reiterates the fundamental recklessness of the financial sector. This is fundamentally fraudulent. By raising the costs of foreclosure, here it appears that the state attorney generals seek massive loan write-downs, meaning massive loan losses to banks.
Second, many key loan and mortgage documents were not recorded in a proper way and instead used a nominee of dubious legal standing--in particular an outfit called MERS. This means of tracking mortgages seems to be a colossal failure because the courts are increasingly refusing to enforce mortgages held in nominee names. Consequently, there is some chance that a significant portion of the 64 million mortgages held in the name of MERS will be unenforceable leading to massive financial losses. Professor Chris Peterson suggests that MERS grew from hubris that exalted short tern profits over long term legal risks.
Third, it appears that many mortgage documents simply cannot be located. This one really baffles me. According to Professor Katherine Porter this is very common. Basically it appears that investors were induced to buy mortgage pools without enforceable mortgages. This will spawn years of litigation and accompanying losses for the financial sector. And, it is likely to require massive loan write-downs as banks renegotiate loans in the shadow of missing documents.
One financial expert calls this "the biggest fraud in the history of capital markets." According to Professor Georgette Phillips of the Wharton School of Finance: "This entire debacle is a symptom of the Wild West, shoot first and ask questions later, attitude of the securitization industry." My friend Christian Johnson puts it more succinctly: "This is all unbelievably bad."
Where does this all lead? Undeniably, this will mean a major loss of bank capital in a context where both the banking sector and the economy generally are already vulnerable, as Nouriel Roubini (48 minute mark) and Chris Whalen (1:07) make clear in this video. Moreover, this will hardly help the residential real estate market recover. So this will likely extend our economic problems, at best, and has the potential to trigger a major financial crisis, at worst.
The magnitude of the problem is betrayed by the banks' resort to congressional fixes. President Obama just vetoed legislation that would have eased many of the banks' documentation problems. The banks would not have sought such legislation unless they needed it to resolve a serious problem. Only the banks know the magnitude of this problem with certainty, but there is simply no doubt that is is now a major economic problem.
For me, however, the question is: where were all the lawyers when these securitization deals came down?
I agree, where were all the lawyers? Who was drafting the 6,000 affidavits in support of foreclosure per week that the "robo signers" were executing? Attorneys have a legal fiduciary duty to protect their clients. This relationship is of the utmost importance and is why non-lawyers put their confidence and trust into their relationship with their attorney. This fiduciary duty, especially regarding the management of money, is essential in this economy. In addition, banks owe the same duty, an ethical relationship of confidence or trust regarding the management of their money, to their investors and mortgagees. We can thank the lawyers and financial sectors who did not use the appropriate standard of care for the massive loan write-downs as banks renegotiate loans because of these missing documents. The last thing we need to do in this real estate downfall is extend our economic problems.
ReplyDeleteBank of America’s misrepresentation through fraudulent documents filed bolsters the theory that that megabanks are the cause for much of this tanking economy from the housing bubble crises, the over-speculation and securitization on Wall Street, the bailout, the egregious bonuses, to the self-interested reservation of lending to reserve funds for future corporate crises. I agree that these unethical and criminal practices by banks need be addressed with serious reprimand. Sadly, anything less doesn’t appear sufficient to alter the megabanks ongoing business practices.
ReplyDeleteStarting from the first day of law school orientation, we have been told the importance of professional responsibilities and ethics. It is a professional commitment to stand by the ethics even during trying times. Some law firms specializing in foreclosures were the few ones hiring during these tough times. I guess the lesson here is to keep your commitment to ethics close to your heart and be ready to walk away and expose the fraudulent acts that are so prevalent in the corporate world.
ReplyDeleteThe disaster with MERS does not only end with the lack of recording the actual mortgages to secure the loan against the property, problems also arose when the actual mortgage was already paid off and proper releases or satisfactions of mortgage were not recorded. I worked with an attorney who owned a title company for over three years and one of my first tasks was hunting down banks to make sure they recorded the proper release documents when the loans were paid off. More often than not, I had to call MERS and even then the mortgage was sold/transferred so many times MERS wasn’t even sure who the true owner of the mortgages were.
ReplyDeleteThis obviously caused a huge problem for sellers and borrowers wanting to refinance because, technically, the public records still showed an outstanding mortgage on the title. Lenders will not lend money if there are more mortgages than they are willing to allow as a priority in front of the new loan.
Another area where MERS has proved disastrous is when borrowers and sellers wanted to obtain payoff for their current loans to refinance their current mortgages or sell their properties. At times borrowers were so confused about who their lender actually was they couldn’t even name their lenders. I had one client come into the office one time with TEN letters, all from lenders who had notified her that her loan was being sold/transferred, etc. etc. and that they were the new lenders. The problem was that the letters spanned a one year period and the client had all but given up on keeping track of who was her lender. Luckily I was relentless and by some miracle, my harassment of MERS paid off, since I was able to find out who her lender was and request a payoff so she could sell her home.